Factory floor, not software park, crucial to India growth – Reuters

If India is to become a manufacturing powerhouse it will need to make things easier for people like Nikhil Nanda, joint managing director of Escorts Ltd, a Delhi-based tractor maker.

The company self-generates up to 40 percent of its power, scrambles to find and retain staff to operate increasingly sophisticated machinery, and must ride herd over a stretched supply chain struggling to keep up with demand — all typical of challenges faced by the country’s manufacturers.

“It’s very difficult to find skilled labour,” Nanda said.

“In terms of forgings, in terms of castings, you have tyre shortages … we are working very, very closely with the supply chain in requesting them to enhance their capacity and then you have so many players who are going after one supplier or four suppliers for the same issue,” he said.

Heavily reliant on services, India must shift economic gears towards manufacturing if it is to maintain near-double digit growth and, more importantly, absorb the more than ten million people set to join the workforce annually in the coming years.

While New Delhi is aware of the challenge and aims to lift manufacturing’s share of the economy to 25 percent over the next decade from about 16 percent now, getting there looks daunting.

Infrastructure is improving but remains poor, the country suffers from a costly talent shortage despite its 1.3 billion people, labour laws are restrictive, land acquisition is difficult and red tape and corruption are rampant.

Supply chains are underdeveloped, capital tends to be expensive, and conditions vary dramatically between states.

Those constraints mean most manufacturing operations in India are small and unable to exploit economies of scale.

“If you look at the growth of manufacturing in the NIEs (newly industrialised economies), if you look at it in China — it all came from one very strong source, which was mass-manufacturing. You’re still lacking that in India,” said Sanjay Mathur, economist at Royal Bank of Scotland in Singapore.

In its favour, India boasts a vibrant corporate sector, a huge domestic market, and a favourable demographic outlook that, with better training, education and government policies, could turn it into a global force in manufacturing.

“There has to be a fast tracking on all these fronts — on labour, on policymaking, on clearances,” said Nomura economist Sonal Varma. “At this stage it does not look like we have done all that groundwork,” she said.

WHY NOT SERVICES?

India’s software sector is world class, leveraging lower costs to export services from high-tech hubs such as Bangalore and Hyderabad to the United States and Europe.

That success has fuelled the notion that India might make the jump straight from an agricultural economy to one based on services, bypassing the manufacturing stage.

That’s a leap that no major economy has pulled off.

Manufacturing in India accounts for roughly the same share of its economy as peers Brazil and Russia, which unlike India are also big exporters of natural resources. By comparison, Thailand generates 40 percent of its output from manufacturing, while in China the figure is 34 percent.

Services can’t be the sole locomotive for the Indian economy in large part because the sector does not create enough jobs. Services account for about 55 percent of GDP in Asia’s third-largest economy but just 25 percent of employment.

Agriculture accounts for about 15 percent of the economy, a share that is shrinking, but employs 58 percent of workers.

“India is going to add something like 150 million odd workers over the next 10 years. The employment elasticity in the services sector is not that much, which means the manufacturing sector has to absorb that,” said Nomura’s Varma.

SCARCE SKILLS

A shortage of labor is often cited by manufacturers as the most troublesome bottleneck.

India, which spends just 3 percent of GDP on education, must ratchet up the skill levels of its workers if it is to take full advantage of the “demographic dividend” of a surge in its working age population.

Most Indians who work do so in the informal sector and have little or no training. Literacy has risen sharply but among the 74 percent who can read, just 2.2 percent have technical or vocational training, according to a Standard Chartered report.

Employers often spend months or more bringing new hires up to speed, which adds to costs.

“There is, for example, a huge scarcity in availability of civil constructors,” said Armin Bruck, managing director of Siemens Ltd, the Indian unit of German conglomerate Siemens AG, which employs 19,000 people in India and can spend as long as two years training a single employee.

Less than 20 percent of working age women are in the workforce. By comparison, the factories of southern China are often staffed almost entirely by women.

Restrictive labor laws make it difficult to shed staff, which in turn discourages hiring. Any workplace with more than 100 people must notify the government if it wants to cut jobs.

LAND, POWER, POLICY

Beyond bolstering its workforce, India needs to streamline land acquisition and speed building of infrastructure, meeting its target of $1 trillion in investment in the next five years and improving a poor track record of finishing projects on time.

Special economic zones (SEZs) of the type that China used to help kick-start its export-focused manufacturing sector are a partial solution but not a cure-all.

While some $45 billion has been invested in India’s SEZs, which directly employ nearly 680,000, the zones have been dogged by allegations of land grabbing by real estate sharks taking advantage of relaxed regulations.

To reach its target, India needs more forceful policymaking than has been seen from a government that has often been mired in the sort of gridlock that took it six years to approve a $12 billion steel plant by South Korea’s Posco.

The cost of failure will be slower growth.

“In the absence of the manufacturing sector in India taking off, it’s hard to see India maintaining a growth rate of 9 or 10 percent for a sustained period,” said Jahangir Aziz, chief India economist at JP Morgan.